GoodLife Fitness Centres Inc. (“GoodLife”) entered into an asset purchase agreement with Extreme Fitness (“Extreme”) which involved taking on Extreme’s lease obligations for 635 Danforth Avenue, Toronto. The lease agreement (the “Lease Agreement”) between Extreme and 1079268 Ontario Inc. (“107”) remained silent on the use of the basement attached to the premises in question. When GoodLife eventually acquired Extreme and was assigned Extreme’s lease, 107 brought an application for rectification of the lease and a determination as to whether it was owed back rent by GoodLife for the additional costs arising from the use of the basement. The application judge found that the lease did not include the basement and ordered GoodLife to pay rent in arrears for use of the basement. GoodLife appealed to the Ontario Court of Appeal.

FACTS

The Lease Agreement outlines the premises as follows:

“(d) Premises: the entire property. The Premises consist of three floors plus mezzanine, and the floors have the following areas: ground floor 11, 461 square feet, second-floor 5,526 square feet, third floor 1,1026 square feet, a platform area of 1,654 square feet, and a mezzanine of 4,443 square feet, which floors are shown on the plans’ annexed as Schedule “A”.”

The total square footage, as outlined in the agreement, is approximately 24,110.

The application judge found the terms of the Lease Agreement to be inconsistent with respect to whether or not the basement formed part of the premises governed by the Lease Agreement. While the Lease Agreement sets out that the premises are the “entire property,” it goes on to outline that the entire property involves the ground floor, second and third floor and the mezzanine. Given that the Lease Agreement was inconsistent and vague in this respect, the application judge referred to the negotiations in order to better understand the intent of the parties with respect to the agreement.

The application judge found that the Lease Agreement did not include lease of the basement due to the weight of the evidence. The square footage did not include the basement and neither did the schedules setting out which floors were included. On appeal, the court found that the application judge made an error in law by failing to interpret the lease with regard to the circumstances as a whole.

On September 1, 2006, Extreme emailed 107 via counsel to request whether the agreed amount in the lease was based on square footage and whether the Extreme was leasing the entire property. In response, 107 advised that the premises included the entire building except the kitchen area in the basement—which formed only a portion of the basement—and that the rent was not based on actual square footage.  During cross-examination, counsel for 107 further confirmed the contents of this Email and subsequent drafts of the lease confirm the understanding expressed therein.

The Court of Appeal found that given the application judge’s failure to consider the Lease Agreement in the context of the negotiations, the judge committed an error in law which warranted overturning the decision.

OUR THOUGHTS

Courts are often called upon to rectify contracts containing vague and inconsistent terms. When addressing a contractual dispute, courts must remain cognizant of the parties’ right to freedom of contract; that is, the parties’ right to freely enter into agreements and their right to rely on such agreements. Ideally, a contract should reflect both parties’ intentions accurately. Unfortunately, however, and as we have seen in this case, parties to a contract will often have vastly different opinions as to what was agreed upon.

When a contract contains vague terms or terms that are inconsistent with one another, courts must look to the “surrounding circumstances” in order to accurately deduce the parties’ respective intentions. This is easier said than done. In reality, courts can never truly know the intention of the parties at the time the contract was formed. As such, they must remain careful so as not to misread a party’s intentions and retrospectively impute into a contract terms which were never truly agreed to. On the other hand, parties may and often do rely on poorly drafted contracts to avoid their obligations. Courts do their best to balance these competing interests by addressing all relevant evidence, but doing so often ends up being a “shot in the dark,” because it is very difficult to accurately gauge both parties intentions often long after the agreement was formed. As such, it is very important for people to speak to a lawyer before entering into a contract and to communicate to their lawyer their specific interest(s) in a given transaction.